An extract from The Corporate Governance Review, 11th Edition
Corporate leadershipi Board structure and practices
Dutch corporate law has traditionally provided for a two-tier board structure, consisting of a management board and a separate supervisory board (each of which is governed by different statutory provisions); however, the institution of a supervisory board is only mandatory for companies subject to the structure regime.3 A company is subject to this regime if, for a period of three consecutive years:
- its issued capital and reserves amount to not less than €16 million;
- it has a works council instituted pursuant to a statutory requirement; and
- it regularly employs at least 100 employees in the Netherlands.
Since 2013, Dutch corporate law has also provided a statutory basis for the one-tier board structure. However, through the influence of international developments, the one-tier board structure had made its way into Dutch corporate practice prior to this legislation. Therefore, the Corporate Governance Code of 2008 already contained provisions relating to listed companies with a one-tier board structure. In 2016, the new Code clarified how companies with a one-tier board must apply the Code by, inter alia, specifying that the current rules for supervisory board members also apply to non-executive directors.
Generally, the one-tier model is considered to be suited to companies in a highly dynamic environment, such as those in the technology sector, complex companies that need to act quickly in crisis situations, companies that are in the process of being listed and in which a major shareholder is closely involved in the company's management or supervision (family businesses) and companies that form part of an international group or have an international group of shareholders.4
In practice, the one-tier model and the two-tier model appear to be growing closer to one another: in companies with a two-tier board structure the supervisory board is now expected to perform a more active role, while in those with a one-tier structure it is often required that the majority of board members consist of independent non-executives. According to the new Code, the latter is also mandatory. For this reason, some commentators speak of a convergence towards a 1.5-tier structure.5Management board
The management board is charged by law with the duty to manage the company, subject to restrictions imposed in the articles of association.6 It is generally accepted that management in any event includes directing the company's day-to-day affairs and setting out its strategy. It should be borne in mind that in accordance with the Dutch stakeholder model, the board must take into account various interests, not only those of the enterprise and shareholders, but also those of other interested parties, such as employees and creditors.
The average size of the boards of Dutch listed companies has been declining; a significant number of companies even have two-member boards (typically a chief executive officer (CEO) and a chief financial officer (CFO)). The rise of this CEO–CFO model can be explained by a number of factors, one of which is the popularity of the executive committee (exco), in which board members and senior managers have seats; in these set-ups, a larger management board makes less sense. Although clearly desirable in terms of efficiency, excos also raise several governance issues that require due consideration. The new Corporate Governance Code Committee does embrace the exco; however, it requires companies to render account of governance issues, such as how the interaction between the exco and the supervisory board will be structured. Furthermore, the exco's role, duties and composition must be set out in the management report.Supervisory board
The function of the supervisory board is to supervise and advise the management board and oversee the general state of affairs within the company.7 Like the management board, the supervisory board must take into account the interests of the company and its enterprise, as well as those of all other stakeholders.
The supervisory board of a structure-regime company has a number of important rights, including the right to appoint, suspend and remove management board members, and the right to approve (or refuse to approve) certain management board decisions, such as a decision to issue shares, enter into a joint venture, make a major acquisition or large investment, amend the articles of association or dissolve the company.8
To enable the supervisory board to perform its supervisory duties, the DCC requires the management board to provide the supervisory board with information at least once a year about the company's strategic policy, its general and financial risks and its internal control system. The Corporate Governance Code expands on the supervisory duties: if the supervisory board consists of more than four members, it must appoint from among its members an audit committee, a remuneration committee and a selection and appointment committee, whose duties are also specified.ii Directors (both management and supervisory board)Appointment and removal
As previously stated, management board members of structure-regime companies are appointed and removed by the supervisory board. In companies not governed by this regime, the general meeting of shareholders has this power. Under the Corporate Governance Code, directors are appointed, in principle, for a maximum term of four years, but reappointment for successive four-year terms is permitted. However, this is limited to only one additional four-year term for supervisory board members with a possible third and fourth term of two year. In the event of a reappointment after an eight-year period, reasons should be given in the report of the supervisory board.
Each management board member who has been employed for two years or more is entitled to claim a transition payment when the contract is (1) terminated by the employer, (2) dissolved in court at the employer's request or (3) has ended by operation of law. Only in exceptional circumstances, such as in the event of any seriously culpable act or omission on the employer's part, or other extraordinary circumstances, could the board member be eligible for additional severance pay, referred to as fair compensation. Under the Corporate Governance Code, no remuneration is justified if the board member ended the contract on his or her own initiative or in the case of seriously culpable or imputable acts.9
Supervisory board members of structure-regime companies are appointed by the general meeting of shareholders based on a nomination by the supervisory board.10 However, the general meeting of shareholders may overrule such a nomination. The general meeting of shareholders and the works council may recommend persons for nomination. An individual supervisory board member of a structure-regime company may be removed only by the Enterprise Chamber of the Amsterdam Court of Appeal, at the request of the company, the general meeting of shareholders or the works council.11 However, if the general meeting of shareholders passes a vote of no confidence in the supervisory board as a whole, this results in the immediate removal of all board members.Independence and expertise
The DCC and the codes contain several provisions intended to safeguard the independence of supervisory board members, such as the absence of family ties and business interests.12 The Dutch Central Bank (DNB) has developed its own policy rules. It requires that supervisory board members are independent in mind (independent with respect to partial interests), in state (formal independence) and in appearance (no conflicts of interest).
A great deal of attention is being paid to the expertise of supervisory board members. For example, under the Banking Code, supervisory board members are expected to have knowledge of the risks of the banking business and of the individual bank's public functions. Moreover, banks are expected to introduce a permanent education programme, and legislation has been enacted; since 1 July 2012, management and supervisory board members of financial institutions have been subject to a stricter 'fit and proper' test, to be applied by the AFM or DNB.
Additionally, in 2017, the guidelines on suitability assessments of the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) and the European Central Bank's 2017 guide to assessments of board members were introduced. The AFM and DNB support this development. As shown in 2015 by the EBA Peer Review Report on suitability, Dutch assessment procedures are considered as good practice, and the European assessment procedures are largely in line with the current Dutch take on assessments.13Caps on the holding of multiple supervisory board memberships
The number of supervisory positions a management board member or supervisory board member is allowed to hold at large legal entities is limited by the DCC. In principle, a management board member may hold a maximum of two positions as a supervisory board member in addition to his or her management board position; for a supervisory board member, the limit is five supervisory positions, with a position as a management board or supervisory board chairperson counting as two.
Under the Code, the approval of the supervisory board is required for a management board member of the company intending to accept a supervisory board membership elsewhere.14
For banks and certain types of investment firms, the Capital Requirements Directive (CRD IV) has introduced limitations for 'significant institutions'.15 As a rule, a management board member is limited to two directorships, whereas for a director, a maximum of four directorships (in total) or one management board position combined with one other directorship applies. The Dutch implementing rules, which stay very close to the CRD IV regime, entered into force in August 2014.16Diversity
Over and above these measures to improve the quality of management and supervision, rules to promote gender diversity within the management boards and supervisory boards of large companies have applied in the Netherlands since 1 January 2013, the target being that the board is at least 30 per cent female and 30 per cent male. The rules are of a comply or explain nature: if the target is not met, this will not lead to the imposition of sanctions, but an explanation must be given in the management report as to why the target was not met and what steps will be taken towards meeting it. In November 2020, a bill, to be implemented in stages, was submitted to the Dutch Parliament, introducing a 30 per cent quota for both women and men for the supervisory boards of listed companies. If a man is appointed to a vacancy on a supervisory board where fewer than 30 per cent of the seats are occupied by women, the appointment would be declared invalid and the vacancy would remain open. Additionally, large companies are required to set their own ambitious targets for the boardroom and senior management. The target must exceed the board's current percentage of women and should be increased gradually. Since legislative processes may be rather lengthy, entry into force is not expected before the end of 2021, at the earliest.
Narrower in scope but still relevant, Directive 2014/95/EU requires large companies to have a description of the diversity policy applied in relation to the undertaking's administrative, management and supervisory bodies.17 The Non-Financial Reporting Directive was implemented in Dutch law and entered into force on 1 January 2017.18 Diversity under this Directive has a wider significance than gender alone, but also includes, inter alia, background, expertise, nationality and experience.Conflicts of interest
Neither a management board member nor a supervisory board member will be permitted to take part in any discussion or decision-making that involves a subject or transaction in relation to which he or she has a conflict of interest. The DCC provides subsequently that if the board member nevertheless does take part, he or she may be liable towards the company, but the transaction with the third party will remain valid, in principle.Internal liability
A management board member or supervisory board member who has performed his or her duties improperly may be held personally liable to the company. In principle, each board member is liable for the company's general affairs and for the entire damage resulting from mismanagement by any other board member (principle of collective responsibility). A board member may avoid liability, however, by proving that he or she cannot be blamed for the mismanagement. The allocation of duties between the board member and his or her fellow board members is one of the relevant factors in that respect. In the one-tier board model, an internal allocation of duties among the board members is permitted, but this does not change the directors' collective responsibility for the company's management. The non-executive board members (i.e., those not charged with attending to the company's day-to-day affairs) may therefore be held liable for the mismanagement of an executive board member. For that reason, it is advisable that board members keep each other informed of their actions and actively inform each other, sometimes also referred to as a monitoring duty.
It is a well-established concept of Dutch law that personal liability should arise only in situations of apparent mistakes or negligence. In this context, the concepts of, for example, 'severe fault' or 'apparent mismanagement' are developed in case law or are part of statutory provisions. Case law reminds us, however, that this does not imply immunity.19
The Supreme Court has held that only the company, or a bankruptcy trustee in cases of insolvency, may sue a board member for mismanagement under Article 2:9 of the DCC; there is no shareholder derivative action under Dutch law.20 However, in certain situations, directors may incur personal liability as regards third parties, such as shareholders or creditors of the company on account of tort or on account of specific provisions in the law, such as in the case of insolvency caused by apparent mismanagement.External liability
As a general rule, management board members will not be personally liable for the company's debts or other obligations as regards creditors or other third parties. Liability might only ensue if that board member (1) can be seriously blamed for having conducted a wrongful act on the company's behalf towards a third party, (2) is subject to liability pursuant to certain specific statutory grounds or (3) is penalised pursuant to criminal or administrative law. A parent company or its directors may, under certain circumstances, also be liable for the debts of a subsidiary.
If a company is declared bankrupt, special rules – including certain evidentiary presumptions – apply. Under these rules, each management board member is personally liable for debts that cannot be satisfied from the assets of the bankruptcy estate if the management board was guilty of clear mismanagement during the three years preceding the bankruptcy and it is likely that this was an important cause of the bankruptcy. Besides failure of the management board to comply with its accounting obligations and its obligation to file the annual accounts, clear mismanagement constitutes conduct that is seriously irresponsible, reckless or rash; the trustee in bankruptcy must show that no reasonably thinking board member would have acted in this way under the same circumstances. Case law shows that supervisory board members are not immune in this respect.21